AUM vs Total Assets: Understanding the Key Differences (2024)

• 13 December 2023

Asset Under Management (AUM) and total assets are two commonly used terms in the world of finance. However, the majority of people tend to confuse them and use them interchangeably. This confusion is particularly prevalent in Asset Management Companies (AMCs), where AUM is often considered the same as the total asset of the AMC.

But is that really the case?

The answer is ‘no’. While the terms might seem similar, they have significant differences that are crucial for you to understand, specifically in the case of an AMC, a bank, or an insurance company.

This article will explore the difference between AUM and total assets. So, let’s dive into this topic and break down the myth surrounding these two terms.

What is Asset Under Management (AUM)?

Various industries have specific types of assets that are utilised to generate profits.

For instance, banking institutions provide loans to clients and earn interest in return. As a result, a loan book is an asset for a bank.

On the other hand, Asset Management Companies collect money from investors and invest in various asset classes, such as equities, bonds, gold, and government securities, to earn returns. The assets an asset management company manages on behalf of its clients are its primary assets.

Furthermore, premiums collected by insurance firms are considered as their assets, and these funds are invested to earn additional revenue in the form of interest, dividends, and capital gains.

The total of the assets each company manages to generate profits is called Asset Under Management (AUM). In short, AUM measures the total value of the funds or assets these companies manage on behalf of their clients to earn returns.

Isn’t this what we call total assets?

The answer is ‘no’.

What are Total Assets?

The AUM of an asset management company is derived from multiple sources. These sources include investments gathered by the AMC itself, from external entities such as insurance companies, and from third-party entities.

The AMC levies a certain percentage of fees for managing these investments, which is the profit they earn, and this profit is added to the reserves in its balance sheet.

The total assets of a company may be smaller than its assets under management (AUM) because the AUM includes assets managed on behalf of third parties as well as the premium collected from their own clients. In contrast, the total assets only include the company’s owned assets and are reflected in their balance sheet.

What Does This Mean For Investors?

As an investor, analysing and comparing the AUM of different AMCs can provide valuable insights for investment decisions. By looking at the AUM size, you can understand the scale and position of different AMCs in the market. This can help you decide where to invest your money wisely.

Moreover, if you want to know how much other investors trust a particular AMC, you can also check out the growth in the AUM of that AMC. This can give you an idea of AMC’s reliability and performance.

If you want to generate higher returns, it’s good to note that a higher equity and lower debt mix in an AMC’s AUM can potentially give you higher returns. However, higher debt and lower equity mix can provide more stability but with lower returns.

It’s also essential to remember that the valuation of an AMC or mutual fund company often depends on their AUMs and equity-debt mix. Therefore, paying attention to these factors is essential when evaluating an AMC’s performance and potential returns on investment in the AMC’s shares.

Overall, analysing and comparing AUMs and the equity-debt mix of different AMCs can be crucial to your investment strategy. By doing this, you can gain valuable insights into the potential of different AMCs, which can help you make informed investment decisions.

*The article is for information purposes only. This is not an investment advice.

*Disclaimer:https://tejimandi.com/disclaimer

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